Northern Rock a Bank gets Nationalized

Here is my opinion about the Nationalization of Northern Rock. If you don’t know the story here are 2 good places to read: Detailed Summary of Northern Rock and the crisis: A current FT article about the Nationalization.

From the FT article: (my comments are in blue)

Shares in the bank, which closed at 90p on Friday, will be suspended on Monday morning and shareholders can expect virtually no compensation for their equity.

Northern Rock is bankrupt. The Government helped out with an emergency loan but NR is bankrupt. Why would the shareholders be allowed to make money? The nationalization makes sense as the Government has access to cheap money. With Northern Rocks current (before nationalization) refinancing rate NR makes losses on a daily basis.

 

The government’s move stunned shareholders, who were last night considering action. Jon Wood of the SRM hedge fund, the bank’s biggest shareholder, said: “This is a very sad day for the stock market, banking industry and the reputation of the UK as a financial center.”

I am very sad about the Northern Rock crisis but the one thing that makes me smile a little bit is that the greedy Hedge Fund Managers who thought the government would help them (why should the government help them?) will loose a substantial amount of money through a clearly not overly intelligent bet. Now all the government has to do is make the Nationalization without mistakes so that the greedy Hedge Funds cannot sue the Bank / Government.

 

Robin Ashby, founder of the Northern Rock small shareholders group, said he was “shocked and appalled” that shareholders “were having the bank stolen away from them”.

There was nothing to be stolen. The bank without the governments emergency bail out is bankrupt e.g. dead e.g. not able to operate (!) Can you steal a dead bankrupt company? I feel sorry for the small shareholders. However if investments in the stock market can be risky…

 

Sir Richard, whose group only found out about the government’s decision just before it was announced, said he was “very disappointed” in the decision and believed he had “a very strong proposal”. Virgin had been asked to pay £200m for a government guarantee and £100m-£200m for equity warrants but it is believed that it found this too difficult.

If Northern Rock had been worth £5bn it is understood that the government would only have received £500m in warrants, whereas the Virgin consortium could have made between £1bn and £1.5bn, causing huge embarrassment for the government.

Whilst I believe the Virgin group is better at running a business 😉 Sir Richard Branson is a hard core business man and would only take on the bank if he could double his investment in 3 years or triple it in 5. Why should the tax payers support this move and the government support him through special government guarantees and loans?

What do you think?

 

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2 thoughts on “Northern Rock a Bank gets Nationalized

  1. André,
    I had a look at this argument on the NR problem a little while ago – here.
    The basics of it, though, are that NR is not bankrupt, just unable to pay the depositors now. As the mortgages and other assets of NR are realised they should be able to get all of their money back, plus full interest. The shareholders will also be able to get a large amount of their money back.
    The problem was that NR ran out of ready cash – not assets. To put it another way. Imagine you had a house worth GBP10 million and no mortgage. However, you also have no cash and owe someone GBP1 million -and they want it now. You cannot pay, but you are not worthless as the house is worth more than the debt.
    That is the sort of situation NR was in.

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